Dollar bears face letdown on Fed forward guidance

Emma Lawson, Senior Currency Strategist, National Australia Bank expects U.S. dollar weakness to continue this week, but notes the longer-term outlook for the currency is positive.

The U.S. dollar Index will likely extend its slide this week on expectations that top Federal Reserve policymakers - including current chairman Ben Bernanke - will reiterate it's still too early to start cutting stimulus as the economic recovery isn't durable enough, according to CNBC's latest market survey of currency traders, analysts and strategists.

Strategists will also look for signals from the Fed speakers - which will include voting members of the central bank's main decision-making body – the Federal Open Market Committee (FOMC) – on whether they support lowering the forward guidance threshold for unemployment, which may influence future policy direction, from the current 6.5 percent to possibly as low as 5.5 percent.

Bernanke, whose term expires on Jan. 31, is scheduled to speak at the annual dinner of the National Economists' Club in Washington D.C. on Tuesday.

On the same day, FOMC voting member and Chicago Fed President Charles Evans delivers the keynote at the Midwest Bank Leaders Conference. William Dudley, President of the New York Fed and FOMC vice-chairman, speaks on Monday while St. Louis Fed President James Bullard - who also holds voting rights - speaks on the economy and monetary policy Wednesday, coinciding with the release of the minutes from the Fed's Oct. 29-30.

"The USD might come under pressure as the doves get their say," said Emma Lawson, senior currency strategist at the National Australia Bank in Sydney. "The market had been thinking about a December taper - I think that's going to be pushed out through to March after they speak."

Fed chief Ben Bernanke "has the opportunity to say more about the changing of the threshold - the unemployment level they need to see before they start raising interest rates," Lawson said. "If he moves it down to 5.5 percent, there's potential for those who've built up USD longs to start to unwind some of those positions for the week."

Bullish positions in the U.S. dollar look stretched, many strategists said, suggesting that the currency may be vulnerable to weakness.

Non-commercial large futures traders, including hedge funds and large International Monetary Market speculators, held an overall U.S. dollar long position – or bets that the currency will rise – totaling $14.46 billion as of November 12, according to Reuters, a weekly increase of $7.44 billion from November 5.

This latest data put U.S. dollar positions at their most bullish level since September 10 when U.S. dollar longs stood at a little over $22 billion.

According to CNBC's latest poll of currency market sentiment, 48 percent (11 out of 23 respondents) believe the U.S. dollar will fall this week although a significant proportion of the group (8 respondents, or more than a third) say the dollar will gain as there's a risk that this week's Fed speakers may reveal few details about forward guidance, and this lack of information will be interpreted as positive for the currency. Four out of 23, or 17 percent, expect the dollar to trade around current levels.

This week's Fed speakers and the October minutes "will provide more insight into whether policy-makers are willing to consider tapering as early as the December 17-18 meeting," said Mansoor Mohi-uddin, chief currency strategist for UBS.

"The more pessimistic consensus expects officials will wait until the March 18-19 meeting or later," he said. "We expect dollars bears will be surprised here and expect the current rebound in the dollar from this year's lows of 1.38 against the euro to continue."

UBS expects policymakers will vote to cut bond buying at the January 28-29 FOMC meeting.

Aroop Chatterjee, New York-based currency strategist at Barclays Capital, said expectations of an adjustment in the Fed's forward guidance "are running a little bit ahead of the reality" in some quarters of the currency market. "There's some scope for disappointment, at least in the short run, which is one of the reasons why we think that the dollar could see a bit of a gain this week," he told CNBC's 'Squawk Box' on Monday.

Jens Nordvig, Global Head of FX Strategy at Nomura, expects the dollar to strengthen but the move higher will only happen in the later stages of next year.

"Tapering and higher U.S. yields will not necessarily generate broad-based USD gains in short-order," Nordvig said. "However, when growth breaks to 3%, and short rates start to drift higher, the dollar is likely to move. We are trying to be patient, and not jump on to this trade too early. Still, the next big dollar trade is likely to be a long one, but it may only materialize later in 2014."

The Intercontinental Exchange traded Dollar Index tracks a basket of six major counterparts of the greenback and the euro represents a near 58 percent weighting, making the gauge prone to swings in the single European currency. The Index traded at 80.82 at 12.45 p.m. Singapore time.

Markets will be watching the week's scheduled U.S. data releases – which include CPI inflation, Existing Home Sales and retail sales on Wednesday amongst the highlights – for taper implications.

Europe's single currency gained 0.8 percent against the dollar last week, touching $1.3505, its highest since Nov. 7. The euro stood at $1.3490 at 12.45 p.m. Singapore time.

Sean Callow, Senior Currency Strategist, Westpac Bank, said he has a "mild bullish bias" for the U.S. dollar via the Dollar Index, based on a possible retracement in the "slow growing" euro this week. On the U.S. data front, Callow said Westpac's "data surprise model is still quite low, warning that there are more upside surprises ahead versus consensus than downside surprises."